2018 Compliance & Regulation Outlook: 'Stars are aligned' for GSE reform

WASHINGTON — 2018 could be a breakout year for GSE reform. House Financial Services Committee chairman Jeb Hensarling, R-Texas, has finally bowed to reality and realized his GSE reform plan, called the PATH Act, was going nowhere.

Until recently, there was a consensus among policymakers that Fannie Mae and Freddie Mac needed to be eliminated. That's changed. And Hensarling's shift moved the odds of reforming the two government-sponsored enterprises — Fannie Mae and Freddie Mae — from zero to nearly 50%, according to Edward Mills, a Washington policy analyst at Raymond James.

"We expect a lot of activity on GSE reform in both the House and Senate banking committees," said Scott Olson, executive director of the Community Home Lenders Association.

But it will be challenging to get a bill across the finish line, "especially in an election year," said Olson, a former House Banking Committee staffer.

David Stevens, president and chief executive of the Mortgage Bankers Associations, seems more optimistic.

"The White House wants to do GSE reform and it seems the stars are aligned," Stevens said in an interview.

"As I talk to policymakers working on GSE reform today, this is the most promising legislative effort I have seen since the GSEs were placed into conservatorship" in 2008, he added.

"I am expecting they will have explicit language that outlaws preferred pricing or credit terms" for the larger lenders. This would ensure a level playing field so small and large lenders receive the same pricing for their mortgages.

"No one would get a sweet heart deal" from Fannie or Freddie, Stevens said.

In the meantime, Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mel Watt reached an agreement to let Fannie Mae and Freddie Mac each build a $3 billion capital buffer to avoid a potential crisis.

The Senate is also expected to confirm Brian Montgomery to serve as Trump's Federal Housing Administration commissioner. But Montgomery's confirmation was delayed until Congress returns in January.

Senate Democrats are insisting on a recorded vote by the full Senate.

Montgomery previously served as FHA commissioner during the Bush administration from 2005-2009.

Under Montgomery, the FHA is expected to expand its condominium loan program and implement a premium reduction to make its traditional single-family program more affordable.

"There will be a move to gear FHA more toward affordable first-time homebuyers and increase originations," Mills said.

Attorney Phillip Schulman also expects the Department of Justice will ease off on False Claims Act litigation against mortgage lenders in 2018. As the DOJ pulls back, the Department of Housing and Urban Development will take more responsibility for enforcement, according to the partner at Mayer Brown.

On the deregulation front, the new Consumer Financial Protection Bureau acting director Mick Mulvaney is likely to be aggressive when it comes to paring back the Qualified Mortgage and other CFPB regulations. Already, the bureau said it will be lenient in enforcing the new Home Mortgage Disclosure Act rules that take effect Jan. 1.

Under the CFPB's charter, the agency is authorized to review its regulations every five years.

"There is a huge opportunity to update the QM and mortgage servicing rules," Mills said.